Every consumer has a red-money income and a blue-money income and each commodity has a red price and a blue price.You can buy a good by paying for it either with blue money at the blue price or with red money at the red price.Harold has 12 units of red money to spend and 40 units of blue money to spend.The red price of ambrosia is 1 and the blue price of ambrosia is 4.The red price of bubble gum is 1 and the blue price of bubble gum is 2.If ambrosia is on the horizontal axis, and bubble gum on the vertical axis, then Harold's budget set is bounded by
A)a vertical line segment and a horizontal line segment, intersecting at (12, 20).
B)two line segments one running from (0, 32)to (10, 12)and the other running from (10, 12)to (22, 0).
C)two line segments, one running from (0, 32)to (12, 20)and another running from (12, 20)to (22, 0).
D)two line segments, one running from (0, 30)to (12, 20)and the other running from (12, 20)to (24, 0).
E)a vertical line segment and a horizontal line segment, intersecting at (10, 12).

Question

Quizplus · Accepted Answer

Harold's budget constraint for buying ambrosia with red money is 12=1P_A+1P_B, which gives the equation P_B=12-P_A. Similarly, his budget constraint for buying ambrosia with blue money is 40=4P_A+2P_B, which simplifies to P_B=20-2P_A. By equating the two equations for P_B, we get P_A=4 and P_B=8. Therefore, Harold's budget set is a line segment from (0,32) to (4, 8), and another line segment from (4, 8) to (12, 20). This corresponds to answer choice C.

Every Consumer Has a Red-Money Income and a Blue-Money Income